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How to Reform China’s Fiscal System?

Apr 13-2020   



In the next 30 years, the Chinese government should prioritize economic efficiency and distributive fairness, and China’s public finance system ought to progress with the times and play its due part, argues Prof. Lin Shuanglin of the NSD in his paper in China Economic Journal.

 

The paper - How to Reform China’s Fiscal System? – offers thoughts and advice on three aspects: First, fiscal revenue and outlay; second, safeguarding people’s livelihood and enhancing societal fairness; and third, further standardizing the fiscal system. 

 

Prof. Lin proposes improving the taxation system and optimizing the structure of government spending. Currently, consumption-related taxes constitute the mainstay of the taxation scheme, accounting for 50% of all tax revenues. Despite some benefits, consumption taxes are not progressive and contribute little to distributive fairness. The other major tax is corporate income tax, accounting for 23% of all tax revenue in 2018 and far higher than that of developed countries and most developing countries. Such a high level will be detrimental to the Chinese economy amid developed countries’ rush to reduce corporate income tax. As of income distribution, the personal income tax is not in an ideal shape and relies almost completely on the working class. Prof. Lin suggests strengthening taxation on the high-income class, particularly by levying on personal assets.

 

The pattern of government expenditures points to the same problem as taxation: efficiency is prioritized while re-distribution is neglected. The direction of reform should be to reduce outlays on the economic front to avoid resource wastes, corruption and deficit build-up, and to channel more spending on redistribution such as education and medial services.

 

More still needs to be done to streamline and optimize the fiscal relations between the central government and local governments. The latter has a heavy responsibility for spending but is hamstrung by disproportionately low revenues, resulting in some governments misusing ad-hoc funds or resorting to debt. To re-balance, some outlays should be shifted from local governments to the central government; for instance, a national social security and medical system should be built. It’s also important for local governments to ameliorate their fiscal power. To do so, they should be granted more space for taxation legislature and fiscal expenditure.

 

How to Reform China’s Fiscal System?

Apr 13-2020   



In the next 30 years, the Chinese government should prioritize economic efficiency and distributive fairness, and China’s public finance system ought to progress with the times and play its due part, argues Prof. Lin Shuanglin of the NSD in his paper in China Economic Journal.

 

The paper - How to Reform China’s Fiscal System? – offers thoughts and advice on three aspects: First, fiscal revenue and outlay; second, safeguarding people’s livelihood and enhancing societal fairness; and third, further standardizing the fiscal system. 

 

Prof. Lin proposes improving the taxation system and optimizing the structure of government spending. Currently, consumption-related taxes constitute the mainstay of the taxation scheme, accounting for 50% of all tax revenues. Despite some benefits, consumption taxes are not progressive and contribute little to distributive fairness. The other major tax is corporate income tax, accounting for 23% of all tax revenue in 2018 and far higher than that of developed countries and most developing countries. Such a high level will be detrimental to the Chinese economy amid developed countries’ rush to reduce corporate income tax. As of income distribution, the personal income tax is not in an ideal shape and relies almost completely on the working class. Prof. Lin suggests strengthening taxation on the high-income class, particularly by levying on personal assets.

 

The pattern of government expenditures points to the same problem as taxation: efficiency is prioritized while re-distribution is neglected. The direction of reform should be to reduce outlays on the economic front to avoid resource wastes, corruption and deficit build-up, and to channel more spending on redistribution such as education and medial services.

 

More still needs to be done to streamline and optimize the fiscal relations between the central government and local governments. The latter has a heavy responsibility for spending but is hamstrung by disproportionately low revenues, resulting in some governments misusing ad-hoc funds or resorting to debt. To re-balance, some outlays should be shifted from local governments to the central government; for instance, a national social security and medical system should be built. It’s also important for local governments to ameliorate their fiscal power. To do so, they should be granted more space for taxation legislature and fiscal expenditure.